There are far too many instances of companies buying out another business more on the decision of an inflated ego than on the strength of investment credentials. By TOM McKASKILL.
By Tom McKaskill
There are far too many large scale acquisitions that are dictated by senior management ego than objective analyses of underlying profitability.
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Too often, companies buying out another business do so more on the decision of an inflated ego than on the strength of investment credentials. If you think that this is limited to large companies, then think again.
SME entrepreneurs who want to grow aggressively are often so consumed by the vision of being bigger that they often fail to see the obstacles in the deal. Too often the larger salary and benefits they anticipate from being bigger colours their view, or they want to be seen at the head of a larger business and see an acquisition as a quick path.
Few anticipate the problems ahead in actually bedding down the acquisition and making it pay off.
Large corporate acquisitions and mergers are often done by professional management on the justification of being bigger to compete better, gain access to funding markets previously out of reach or to fend off anticipated competition or market changes. But one wonders whether it is the personal benefits that accrue with size that are the underlying motivations.
The fact that such a large portion of acquisitions fail to achieve positive shareholder value must inevitably lead to such a conclusion. But smaller owner-managed firms are most often managed by the most significant shareholder – why would they take such risks?
We cannot assume that all owner mangers are knowledgeable about the risks inherent in an acquisition nor that emotion and ego do not play a role in “seizing the moment”. Many acquisitions occur due to unexpected opportunities to acquire or to owners seeing an acquisition as a way out of a difficult situation.
In the heat of the moment, the obvious benefits provide the stimulant to bring the deal to a head. What is generally missing is a thorough evaluation of the target and/or a well-thought-out fit with the underlying core strategy of the business.
Opportunistic buying is probably the most risky. Suddenly a business comes on the market and time is of the essence. Often the prospective buyer was not even considering the target firm as a suitable acquisition but, now, time is of the essence if the business is to be acquired.
In this scenario there are often professional advisers and business brokers eager to show just why such an acquisition would be a good fit, with often spurious benefits. At the same time, the potential buyer is enamoured with the thought of all the benefits that would accrue personally and to his business if his business was bigger and had the capabilities and capacity generated through the acquisition.
In this idealistic world, the prospective buyer has neglected the costs, delays and disruptions associated with an acquisition. He or she has also forgotten that the current business is taking up all their available time and resources, and undertaking an acquisition will stretch them to the limit.
Even an efficient and well-managed acquisition can be a challenge. Imagine if the acquired business was put on to the market because it faces problems. Instead of generating incremental benefits for the buyer, it is more likely to negatively affect the acquired business.
The bottom line is that successful acquisitions fit neatly into the core strategy of the buyers business. More often than not, the acquired business has been targeted for consideration and the buyer has a clear understanding of how to extra key benefits from it.
Few opportunistic acquisitions work out positively. If you want to be successful growing through acquisitions then “leave your ego at the door”.
Tom McKaskill is a successful global serial entrepreneur, educator and author who is a world acknowledged authority on exit strategies and the Richard Pratt Professor of Entrepreneurship, Australian Graduate School of Entrepreneurship, Swinburne University of Technology, Melbourne, Australia.